Why Borrowers of Small Loans are a BIG Deal

How multifamily financing is evolving to meet the needs of the non-institutional investor.

(NREI Article) — In an industry where large institutional property investors seem to dominate, it turns out that owners of small apartment properties (with 5 to 50 units) are kind of a big deal. Yes, they house 70 percent of the country’s multifamily renter households, according to the U.S. Census Bureau, but that’s just the beginning.

Most smaller apartment building owners are individuals or small entity owner-investors. Think: sole proprietor or small business. That’s interesting because the historical CMBS cumulative default rate for loans with collateral secured by properties with less than 50 units is lower than properties with more than 50 units.

Why does this matter? Because, despite the attractive credit profile of small multifamily properties and their owners, finding reliable and competitive financing has historically been a challenge for these borrowers. That is, until recently, when the nation’s largest source of multifamily financing made a big move to improve reliable access to credit for non-institutional apartment investors.

“We recognize that there is strength in individual and small entity sponsorship,” said Ben Schweitzer, director of underwriting at Freddie Mac Multifamily. “There is an unmistakable ‘skin in the game’ connection; we find that these borrowers are typically local and hands-on, and that makes a difference.”

In 2014, Freddie Mac Multifamily created a line of business dedicated entirely to financing small multifamily buildings. Today, it has financed more than $10 billion in small loans. What’s more, 99.37 percent of those loans have an individual, or a “warm body”, that signed the guaranty.

A big attractor for non-institutional investors to Freddie Mac is its reputation for reliability, backed by its founding mission—to support liquidity, stability and affordability in the rental market. For borrowers who are unfamiliar with sourcing their loan through a government sponsored enterprise (GSE), the company has advanced highly competitive products that bring together the most sought after loan features. These products are delivered through high-speed, low-cost processing.

“Our focus is on providing a best-in-class small loan experience for non-institutional investors and doing that consistently over the long haul,” said Schweitzer. “As more and more borrowers experience that first-hand, we are seeing growth in our portfolio business and repeat sponsors who want to know that their financing is taken care of.”